The Lowdown from Investment Quorum

Global Markets to 11 March 2019

Highlights

Wall Street notched its worst week for 2019, following disappointing US jobs numbers.

The European Central Bank cuts its eurozone growth forecast after disappointing data.

China reports its steepest year-on-year decline in exports in three years.

There are only three weeks left until Britain is scheduled to leave the European Union.

Overall, a difficult week for global investors but history tells us that patience is a virtue.

Global Market Summary

Ten years ago, on 9th March 2009, we saw the mass capitulation by investors following what has become known as the ‘Global Financial Crisis’. At its lowest point, Wall Street’s benchmark index, the S&P 500, hit the daunting level of 666, during intraday trading, referred to as the devil’s low. This instantly created a perception that Armageddon had arrived.

But, as we all now know, it turned out to have a bottoming out effect that subsequently led to the current 10-year bull market that is still here today. Nevertheless, it has not been a smooth trajectory with many economic, monetary, and geopolitical events creating high levels of volatility.

Throughout this period, the role of central banks in nurturing recovery has been incredibly important. We have seen financial assets and central banks meticulously correlated throughout the period, contributing to the longest bull market in U.S. history. Both the Dow Jones Industrial and the S&P 500 Indices rose by over 400 per cent respectively, whilst the technology-driven Nasdaq indices have advanced by 570 per cent. These numbers are truly incredible, given the fear that global investors faced in the dark days of 2008-2009.

The last two decades have seen the technology sector capture decisive financial market headlines, which at times, could only be described as the “the good, the bad, and the ugly”. But, since those gloomy days of the financial crisis, many tech companies have grown to become the global gorillas within their sector, and indeed the world, whilst others have become significant disruptors within many of the other leading global sectors.

The dominance of the FAANG’s [Facebook, Apple, Amazon, Netflix, and Google] has been highlighted many times in the media over this period, with the likes of Apple and Amazon reaching star status, as they became the first one trillion market cap companies in the world. Indeed, the investment returns from these two companies have been truly remarkable.

Which leads us neatly into today’s important backdrop of macroeconomic data, monetary policy and geo-political events. As history has taught us, we will continue to face further trials and tribulations that are likely to effect the directional drive for financial assets.
Currently, the markets are focused upon the next move from the leading central banks of the world, the outcome of trade tensions between the US and China, a Brexit conclusion and the evolution of China as the second largest economy in the world.

Therefore, similar to the last decade, the continuation of this bull market is unlikely to move upwards in a straight line. We expect periods of economic weakness, volatility and no doubt more crisis points.

We note that investors are nervous over the longevity of the current bull market, which is fully understandable. There are fears of faltering global growth, some of the lowest unemployment numbers ever recorded, subdued inflation and geo-political tensions in many parts of the world.

The downward pressure from trade tariffs has led to a global economic soft patch. China reported its steepest year-on year decline in exports for three years and Europe is suffering from weakening external demand and a temporary shock to the domestic supply.
In the UK, we have seen a downgrade in 2019 GDP forecasts due to the delay in the ratification of the Brexit withdrawal agreement and similar downgrade forecasts for Japan and China. All of which contributed to the stock market correction in December 2018 and the rapid recovery in the New Year. We have seen high single and double-digit returns over the past few months, which is to be expected, especially given the massive inflating of financial assets over the past decade.

Central banks will continue to have the biggest influence on financial markets over the coming months. Their return to a more dovish stance is nurturing a future rebound in global market activity, expected later on in the year. This, in turn, will keep global equities and credit markets in a bullish mode leading to a favourable backdrop for “risk asset trading”.

Similarly, expectations remain high that Presidents Trump and Xi Jinping have reached a consensus agreement on many key issues and we expect a more positive announcement later this month. This could lead to a further relief rally in global equity markets.
The other issue of debate currently overwhelming the UK is the scheduled departure, or not, of Great Britain from the European Union, now only three weeks away. In Prime Minister Theresa May’s recent statement, she urged Parliament to back her on Brexit to “get it done”. Otherwise, she said that “no one knows” what will happen in the aftermath of the commons voting against her withdrawal agreement for a second time on Tuesday.

Prior to this vote, the PM is expected to keep working tirelessly to secure changes to the Irish border backstop in an assurance to avoid an Irish hard border. This is a real sticking point – stopping the PM in getting any sort of Parliamentary approval – with many MPs having grave reservations about the aspect of the agreement.

Whilst the UK is due to leave the EU on the 29th March, any defeat in this week’s vote is likely to lead to a further parliamentary vote to delay the actual departure date. This could lead to a nightmare scenario for those who voted to leave, as it might lead to a possible softer form of Brexit, involving closer ties with the European Union. This might lead to a Brexit that does not comply with what the majority of the people voted for and could subsequently lead to a second referendum that could reverse out Brexit altogether.

And so, whilst we saw global equity markets retreat last week on disappointing economic data and faltering global growth, we still believe that the recent easing in US-China trade tensions, a more flexible backdrop from central banks, and perhaps lower oil prices, will support an upgrade in global growth as we move toward the end of the year. This, in turn, will be positive for global equities, and that is without any positive or constructive outcomes from Brexit.

Global investors need to continue to think in terms of decades and not quarters. We urge investors to not be distracted by the noise, and always remember that “patience is a virtue”. Patience delivers the best returns over longer time horizons.

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.